Steve Quayle News Alerts

September 23, 2003
By James Kynge and Edward Luce

When Zhu Rongji, China's former premier, visited India almost two years ago, the country was paranoid about the competitive threat from Chinese businesses. From batteries to umbrellas, stories abounded about cut- price imports that could bankrupt Indian businesses.

Somewhat undiplomatically, Mr Zhu said the goods he had seen in Mumbai's department stores were at least a third pricier than their Chinese equivalents. India, which had just removed quantitative restrictions on imports, braced itself to be taken to the cleaners.

It hasn't happened yet. In the past two years trade between India and China has more than doubled and is forecast to hit $7.5bn (€6.5bn, £4.6bn) by the end of this year. India is on track for the first time to record a surplus with China. Indian businesses now see the Chinese dragon as their most exciting commercial opportunity.

"Nobody fears the Chinese market any more - everybody just wants a piece of it," said K.K. Modi, head of the Modi Group, a manufacturing company that exports speciality chemicals to China's leather industry.

Mr Modi is one of many Indian executives seeking to boost their presence in China. The same is true of India's information technology - perhaps the only sector (apart, perhaps, from pharmaceuticals) where India is ahead of its faster-growing neighbour.

Fifteen Indian IT companies now have a presence in China. Last year India's IT exports were almost $10bn compared with $1.5bn from China. But 40 per cent of China's IT exports involved Indian IT companies based in China, according to a report by consultants Gartner. In contrast, China's overall exports last year were $318bn compared with India's $60bn. "Software is an area where India is five to seven years ahead," said Mohan Das Pai, chief financial officer of Infosys, an Indian IT company that has won contracts in China's financial sector. "China lacks facility with English and experienced project managers. But China will catch up very fast."

The same cannot be said of India when it comes to China's core competence - assembly and basic manufacturing. So far few Chinese companies have set up plants in India, but several are looking.

Piyush Bahl, head of the Confederation of Indian Industry's new office in Shanghai, said he had visited 18 cities in the three weeks since he took up his post, fielding serious enquiries from more than 20 potential Chinese investors.

But there are barriers to entry. Chinese factory workers are paid less than their Indian counterparts and are more productive. India has rigid labour laws that make it almost impossible to fire an employee or hire contract labour. That is one reason India attracts roughly a tenth as much foreign direct investment as China.

In arecent report, McKinsey, the consultancy, estimated that on average an Indian worker makes three shoes a day compared with 11 produced by his Chinese counterpart. It found a similar productivity gap for T-shirts and ceiling fans. India's tiresome red tape is a further deterrent.

"If you add in the Indian bureaucracy it can be very difficult to make your way," said Ma Jiali, India expert at a Chinese think-tank. "Not to mention the need to take them out to dinner and give them presents."

McKinsey also debunked the notion widespread in India that Chinese companies benefited from export subsidies and artificially low capital costs and produced shoddy goods. It said the size of China's domestic market gave local companies economies of scale over their Indian counterparts. For example, China sells 35m colour televisions a year, compared with 6m in India.

"Whatever you look at - whether it is washing machines or per capita consumption of polyesters - China's market is three or four times the size of India's," said Anil Ambani, managing director of Reliance, India's largest company, which makes petrochemicals and is moving into telecommunications. But Reliance, which accounted for 5 per cent of India's exports last year, is also an example of where India can compete with China. In areas where manufacturing requires high-technology inputs, India is even exporting to China.

Bharat Forge, an auto-components maker based in Pune, north of Mumbai, exported $40m worth of car parts to China last year. The company's advantage derives from intensive use of IT. "All our manufacturing is highly computerised," said Baba Kalyani, chief executive. "Our key advantage is that we find it much easier to hire IT and engineering graduates than our Chinese competitors."

Indeed, some Chinese companies such as Huawei, a Chinese telecoms equipment maker, have also seized on India's potential in high-tech research and production. Huawei recently said it would invest $100m to develop software at its plant in Bangalore.

India's large pool of graduates is also an advantage in other sectors such as medicine. The United Nations buys more than half of its vaccines from the Serum Institute of India, a private company in Pune, for its inoculation programmes. In contrast, much of China's vaccine production is considered substandard.

Yet India's lead in research and development cannot make up for China's superiority in mass- producing goods for export. China's manufacturing success is a far more effective way of spreading wealth to the masses than India's IT model. Almost 100m Chinese are employed in manufacturing compared with 9m Indians. Roughly 1m Indians are employed in IT.

Whether it is China's cheaper, more reliable power supply, its higher rate of literacy or the more rapid turnaround at its ports, China remains an incalculably better environment for most manufacturing than India, which is slowly waking up to this. There are plans, for example, for special economic zones where labour restrictions would be waived. But India is coming late to the party, and many are frustrated that it is still taking too long. "When politicians talk of 'calibrated' reforms, what they really mean is they aren't doing very much," said Mr Ambani. "India cannot afford to have a calibrated reform process."

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